Of spikes and sell-offs
Some investors claim the recent spike in equity volatility has been exacerbated by dealer hedging of variance swaps. While banks admit their hedging has affected markets, they argue changing client demand means they are less exposed to volatility risk than was the case last May. By Jayne Jung
At first glance, the recent spike in equity volatility and associated trading activity bears an uncanny resemblance to the events of May 2006. Back then, hedge funds, proprietary trading desks and asset managers piled into the market to cover exposures arising from short variance swap trades - positions that cost them millions of dollars in mark-to-market losses.
These investors had taken the view that implied volatility, already close to record lows, would remain stable or fall further. Instead
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